India plans to launch trading of government bond futures within the next two months as part of efforts to deepen its financial markets, according to several sources involved in the discussions with the central bank.

These interest rate futures would help banks and financial firms in Asia's third-largest economy assess expectations for borrowing costs and hedge the risks of rate changes to their bond portfolios.

It would also provide the country's policymakers with a valuable gauge to measure market expectations for their future rate decisions.

Although the plans are at an advanced stage, sources said the RBI has not yet finalised the structure of the product, which will allow investors to bet on the direction of interest rates. They declined to be identified publicly commenting on the closely-held discussions.

Getting the structure right is critical for the central bank, which failed in two previous attempts in 2003 and 2009 because of what market participants have said were faulty designs.

New RBI governor Raghuram Rajan has made deepening India's financial markets a priority, in part to prevent trading of derivatives based on domestic products from shifting to overseas markets such as Singapore. “This product is Rajan's baby so everyone is on their toes to make it a success. It will be launched in a month or two months at the most,” said one senior market participant who has been in discussions with the RBI.

In response to a query from Reuters, an RBI spokeswoman said: "We are discussing the product with stakeholders."

Although India has active derivatives markets in currencies and equities, it has struggled to develop liquidity in debt derivatives, depriving banks and other financial firms of a hedging opportunity. Banks, insurers, primary dealers and provident funds own about 90% of Indian government bonds.

India has a vibrant exchange-traded equities derivatives market, with turnover about 14 times that of cash markets, reflecting the potential demand for rate derivatives.

IRFs are widely used in more developed markets. In South Korea, rate derivatives account for 14% of total derivatives traded on exchanges, according to official data.

Although Indian banks trade over-the-counter interest rate swaps (IRS), that structure does not lend itself to long-duration contracts and trading is mostly in the one- and five-year segments. In India, however, the benchmark 10-year bond is by far the most traded.

Sources said the RBI for now is leaning towards benchmarking interest rate futures contracts against a basket of bonds with varying maturities as opposed to using